intro – dow jones:
Dow Jones Industrial Average is also popularly and simply referred to as Dow. It is the stock index of top 30 companies listed on stock exchanges in the US. It is maintained by S&P Dow Jones Indices LLC, a joint venture between S&P Global, the CME Group and News Corp.
While it was initially created to measure the strength of the US economy, since most of the Dow Jones companies are global behemoths like Google, Microsoft, Apple, Nike, Cisco, Visa, Boeing etc., it’s value reflects the strength of the global world economic activity in modern times. Most countries’ large companies are, in one way or another linked to these companies’ revenue. A better gauge of US economic activity is the S&P 500 index.
a detour back in time
Dow Jones Industrial Average came into existence, on May 26, 1896. There were two co-founders – Charles Dow, who was the editor of The Wall Street Journal and a statistician called Edward Jones. Together they created Dow Jones & Company.
Inspite of it’s name, it is no longer an index of companies exclusively in heavy industries sector of the economy. This has kept it relevant in modern times. However, the calculation method has remained unchanged. Dow Jones is not weighted by market capitalisation. Instead, it is calculated by summing up the stock prices of the constituent companies. This is then divided by a number known as the Dow Divisor that is kept constant. Unless there is a change in total number of shares. For instance a stock split, merger, promotion/relegation from the index may warrant a change to this factor.
The reason for this method of calculation goes back to the origin of Dow Jones. The initial calculation of the index was a simple arithmetic mean. Following inclusion and exclusion of a large number of companies for more than a century, this calculation has changed to ensure price continuity. In addition, stock events also meant that a simple arithmetic mean calculation will cause large deviation.
back to today
The purpose of Dow Jones index is to measure the health of the country’s economy. Because an index(in theory) is not affected by impact on a single company or industry. Instead, it offers a generalisation over the top companies that adopt the highest levels of corporate governance standards.
Inspite of the fact that, Dow Jones is not a financial asset in and of itself, there are, now, a number of products to speculate on it’s performance. These products either reference or try to replicate the performance of DJIA. For instance, a mutual fund may hold the shares of companies in the exact(or close to exact) proportion as the Dow Jones. Consequently, the fund managers rebalance the fund as and when there are changes in Dow Jones composition.
Almost all big brokers now offer a 24 hour, Dow Jones CFD and spreadbetting market outside of NYSE official trading hours. However, Dow can only be calculated during exchange trading hours. This is because the share prices of the constituent stocks are not publicly available, outside of official trading hours. However, since there can be market news that may cause a trader to want to speculate on the opening price of Dow next day, these products offer that option.
Therefore, price shown on broker sites outside of trading hours is based on other benchmark indices that are open in their respective market location, for eg. FTSE 100. In addition, the price also depends on the Dow Jones Futures market, the FX rates and index linked funds and ETF’s being traded on other global stock exchanges. While predicting single stocks requires considerable research on that particular company, an index is more sensitive to macroeconomic data.
variables and factors that impact Dow Jones
dollar(USD) rate in fx markets
Firstly, as USD appreciates in value, this causes a drop in foreign investment, since foreign investors get less USD for their currency. Hence, large global investors will not use their USD reserves to buy US stocks. On the other hand, depreciation of USD will make Dow stocks cheaper. Hence, the index will rise in this scenario.
inflation
Secondly, higher inflation means depreciation in the value of USD and that the US companies are able to sell their goods and services at higher prices. Therefore, the index will rise in the short term as companies are bringing in more cash. However, this will then, translate to higher employee wages and higher cost of goods and raw materials. Hence, high inflation over a sustained period of time, will cause Dow Jones to drop in the long term.
interest rates
Thirdly, short and medium term interest rates spike will impact the stock index. This is because higher rates will mean a (relatively)risk free alternative to stocks – a more risky asset. However, longer term high rates will lower bond yields and therefore, the large investors’ money will move to stocks, causing Dow Jones to spike.
and the rest
Finally, other factors such as unemployment rate and PMI(Purchasing Managers Index) also impact Dow Jones. For instance, high unemployment rate will imply drop in consumer demand and this would cause a downward trend for stocks. In contrast, a higher PMI in the US will mean an increase in economic activity, leading to higher employment and a high demand for goods and services produced by Dow Jones companies.
final comments
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this to trading
STOKAI provides daily prediction using algorithms based on all factors that impact Dow Jones price and evolves this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial. If there are any issues, please contact our customer services team.
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.